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Angel Investor vs Venture Capitalist: What Are the Differences?

Written By Alla Levin

January 13, 2023

Angel Investor vs Venture Capitalist: What Are the Differences?

Did you notice all the “how I made my first million” stories? We all want to get rich, and the road to riches starts with getting funding for your startup idea. Startup financing can be tricky, so getting clarity on the various types of investors and how they differ from each other will help your pitch.

In this article, we’ll discuss several different categories of startup funding. This includes angel investor vs venture capitalists and their individual differences.

Contents

What Is an Angel Investor?

An angel investor is an individual or group of individuals, typically a high-net-worth individual or group. They invest in a new or growing business venture. This is in exchange for equity or shares in the business.

Angel investments are riskier than other traditional investments. This is because the investor invests much earlier in the company’s life cycle.

Angel investors provide early-stage seed funding. They believe the business can eventually attract other larger venture capital investments. They are involved in the company to key contacts in the industry by providing:

advice;
mentorship;
introductions;

Angel investors often have expertise in the industry sector in which the business venture is located. That is also beneficial to the development of the business venture. They are supportive of the entrepreneur’s vision. They also provide an opportunity that would not be available by:

traditional financial institutions;
venture capitalists.

If you think this is the type of investing you want to get into, you can try Angel Network.

What Is a Venture Capitalist?

A venture capitalist is an investor who provides financial backing for small, early-stage, or startup companies. This is with the expectation of a return on their investment when the venture becomes successful.

They are generally individuals or a group of investors who take on a certain amount of risk. They invest in unproven companies that lack a track record or have the potential to produce large returns in the future.

Venture capitalists usually have the capital to provide companies with the necessary funding. This is for them to become established and profitable. They may also be called upon to offer their expertise and guidance throughout the process of:

establishing a business;
managing a business.

Venture capitalists work with startups to guide them in business decisions. They are typically well-versed in entrepreneurialism and venture capital.

Angel investor vs venture capitalist: Differences In Sources of Funding

Angel Investors are private individuals who provide funds for early-stage and startup businesses. They typically invest in high-risk businesses needing capital for growth and development. Angel investors get more personal involvement than venture capitalists.

They often act as mentors and provide business advice, as well. Angel investors usually invest smaller amounts of capital than venture capitalists. Their investments are often used to fund early-stage startups.

Venture capitalists, on the other hand, are large institutional investors. They provide capital to businesses that have the potential for long-term growth. VCs are in it for the long haul and often seek higher returns through a longer-term investment strategy.

They tend to invest larger sums of money than angel investors. This is typically between 500K – 100 million dollars. They have more stringent guidelines for their investments.

Differences In the Risk Profile of Investment

The differences in the risk profile of investment between the two are significant. Angel investors tend to take more risks with their investments. They often invest in small, early-stage companies. These investments carry greater potential for higher returns but also have a greater risk of failure.

On the other hand, venture capitalists are more conservative with their investments. They focus on established companies that may have a track record of success. Generally, venture capital investments have a lower risk.

But investors don’t typically get the same returns they could get with angel investments. Venture capitalists have more funds and can support companies with more resources.

Differences In Qualifications & Requirements

Angel investors are defined as wealthy individuals or networks of individuals. They provide high-risk capital to startup businesses in exchange for company ownership or equity. These investors don’t require the same level of due diligence venture capitalists do. The requirements they impose are typically more flexible.

Venture capitalists come from established venture capital firms. They require more qualifications and a more comprehensive due diligence process to invest. They may also have greater amounts of capital available for investment.

The venture capitalists will have boards and back office personnel. They help manage investments and also have more control over the exact details of their investments. In the end, each type of investor has its benefits but will require a different process to acquire the funding.

Angel investor vs venture capitalist: Differences In Opportunity Costs

Angel investors and venture capitalists differ in many respects. But when it comes to opportunity costs, those differences increase. Angel investors are more hands-on and riskier than venture capitalists. The potential for large returns and exponential growth is also much greater.

With angel investors, one usually takes on a lot of risks. This is because their funds are smaller, but the rewards can be greater as they can steer the ship in many ways.

On the other hand, venture capitalists typically have a larger fund and are thus less likely to be as hands-on, but the opportunity costs tend to be much lower due to their more diverse portfolios. So, depending on one’s investment style, one can choose the best suited to their particular needs.